The loan modification process includes a standard method for adjusting loans to new affordable monthly repayment terms. This is called the waterfall method and is mandatory for use under the Treasury Department’s Loan Pilot Plan. This plan is called HAMP – the Affordable Home Modification Program. When the lender reviews your application, part of the process will be determining if your loan and financial circumstances will fit this modification method.
The loan modification process begins with the borrower contacting the lender and requesting consideration for HAMP. It is important that you specifically request this plan because lenders are required to review every homeowner who requests assistance under this plan. While your file is being reviewed for eligibility, the lender is not permitted to move your home forward for a foreclosure sale. So this gives you some time and a second chance to save your home with a loan exercise.
Once you complete your loan modification application and submit it with your income documentation, the entire package will be reviewed for eligibility and acceptance. Here is the basic loan modification process:
- Homeowners are asking to consider HAMP
- The borrower completes the application packet and provides proof of income
- The lender reviews the information provided by the homeowner to ensure its eligibility
- The method of modifying the waterfall and determining acceptability has been attempted
- If the loan can be modified using the standard terms, the homeowner may be approved for a loan modification
- The homeowner enters a 3-month trial modification period, after which the modification becomes permanent
How exactly does the waterfall modification method work? This standard formula uses several criteria to determine eligible loans and borrowers. Remember that a homeowner provides their financial information—monthly income, monthly expenses, cash in the bank, etc.—on their application form and this is the information used when determining whether or not a homeowner qualifies. The lender will use standard methods of reducing the existing mortgage in order to meet the new target mortgage payment. This new payment will equal 31% of the total monthly income of the borrowers and includes principal, interest, taxes, insurance and any home-level dues.
The first step in the waterfall method to reach your target payment is to reduce the interest rate, and the rate can go as low as 2%. If more changes are required to reach the target, the loan term may be extended to 40 years. The final step is to waive or defer some of the principal balance in order to reach the required new target payment. This is called the waterfall method because the lender must follow these steps in order as needed. However, if the borrower’s income is too low or too high, or if the loan balance is so high that a significant reduction in principal is required, the loan modification may be denied.
Homeowners hoping to get approved need to understand how the loan modification process works and more importantly how they must complete their financial statements to be acceptable. If you know in advance how much income you need to prove your eligibility, you will be able to make the necessary adjustments and submit an acceptable application. If you knew that once you cut a few hundred dollars a month in expenses, you’d fit into the guidelines, you sure would, right? This is confusing for borrowers, but you can use loan modification software that will actually show you how much income you need and where you might need to adjust your numbers to match HAMP’s standard guidelines.